Slower Canada growth may keep rates "low for longer"

Louise Egan

4 Min Read

OTTAWA (Reuters) - Economic growth in Canada shifted into low gear in May on unexpected weakness in the manufacturing sector, casting doubt on the country’s ability to distance itself from the disappointing performance plaguing the United States.

The weaker-than-expected 0.1 percent monthly gain in gross domestic product in May, following a healthy 0.3 percent jump in April, puts the second quarter on track for annualized growth of less than 2 percent.

That means the Bank of Canada will likely remain on the sidelines on raising interest rates until at least 2013 because growth doesn’t look fast enough to cause inflationary pressures.

“Following a strong start to the quarter, this print is a bit disappointing and we would not be surprised to see continued weakness bleed into June,” David Tulk, chief macro strategist at TD Securities, said in a note to clients.

“We share the (central) bank’s desire to take the overnight rate higher once conditions improve, which is very unlikely to happen until at least early in 2013. Until that time, the theme of ‘lower for longer’ for the overnight rate will prevail,” he said.

The Canadian dollar slipped after the GDP figures were released, falling to C$1.0035 versus the greenback, or 99.65 U.S. cents, from about C$1.0029 just before the data came out.

Canada fared better than most of its peers in the rich, industrialized world in the aftermath of the 2007-09 global financial crisis, prompting the Bank of Canada to become the first central bank in the Group of Seven to tighten monetary policy after the recession.

Since April this year, the bank has again signaled its intention to raise rates, but unless growth accelerates it has little motive to act.

“Much like its U.S. counterpart, the Canadian economy seems unable to break out of its sub-par growth trajectory,” said Doug Porter, deputy chief economist at BMO Capital Markets.

Other data on Tuesday showed producer prices fell 0.3 percent in June from May as cheaper fuel offset price increases for cars. But without the impact of the Canadian dollar’s depreciation against the U.S. dollar in the month, the producer price index would have fallen 0.8 percent.

Raw materials prices fell for the fifth straight month in June, down 4.0 percent, mainly due to a sharp fall in crude oil prices.

Analysts in a Reuters poll had forecast, on average, 0.2 percent GDP growth in May, following April’s 0.3 percent expansion.

Goods-producing industries overall were flat in May while services industries eked out a 0.1 percent gain in the month.

The mining and oil and gas extraction industry grew at a robust pace for the second straight month as crude production continued to rise after maintenance and production shutdowns in February and March. The 0.6 percent jump in May output followed a 2.0 percent surge in April.

Retail sales, finance and insurance businesses and wholesale trade also contributed to growth.

Contrary to expectations based on previous data on factory sales, manufacturing declined 0.5 percent while construction activity contracted by 0.2 percent as the housing market softened.